US President Donald J. Trump is escalating the trade war with China; markets in Asia nosedived on Monday morning, with the Chinese yuan reaching an 11-year low.
Ahead of the G7 Summit on Friday evening, President Trump announced a 5% hike on existing tariffs – from 25-to-30% — on goods worth $250bn; this will kick-in in September. The US President also announced a 15% tariff on $300bn-worth of Chinese goods, which kick-in in December.
By the end of the trading day on Friday, the Dow Jones industrial average had lost 2.4%.
The US President was responding to Beijing’s announcement of countermeasures to US tariffs on $75bn worth of goods. The Chinese announcement was timed to coincide with a key speech by Federal Reserve Chair Jerome Powell and Trump’s arrival in Biarritz, France, for the G-7 summit.
The latest escalation in the Sino-American trade war finds the US economy in a difficult spot.
The budget deficit is growing faster than projected for four consecutive years, despite economic growth and the highest level of employment in 50 years. The deficit will reach $960bn in 2019 and $1 trillion by 2020, according to the Congressional Budget Office forecast.
The 2017 tax cuts have resulted in a decline in revenue to the tune of $430bn, a gap that has in part been filled with additional borrowing. Instead of economic growth reducing the US debt-to-GDP growth, this continues to surge: in 2018 the US debt-to-GDP ratio stood at 106%.
Republican groups are pressing to keep tax cuts and curb the deficit by reducing federal health care, social care and retirement programs, but that is not likely to happen on an election year. The Democratic opposition too is not prioritizing fiscal consolidation. Many of the party’s leading presidential candidates call for increased spending in programs like Medicare for All: however, they are calling for tax hikes for high earners.
In this scheme, there is little scope for bipartisan compromises, even as the economy appears to be heading towards a recession.
President Trump is campaigning on reelection on the promise of a “phenomenally strong” economy. According to Washington Post, the White House is considering a currency transaction tax that could weaken the dollar and boost exports.
At the same time, the White House is antagonizing the Chair of the US Federal Reserve. In a series of Tweets on Friday, the President accused Jerome Powell of not doing enough to boost growth, going as far as signaling him out as an “enemy” od the US economy. One of the ideas being floated now is to introduce a rotation among the Federal Reserve governors, which would make it easier for any President to politically control monetary policy.
The Federal Reserve is reluctant to embrace calls for rapid interest rate cuts, although markets expect at least two of 25 basis points by the end of the year. The main reason is that Powell apparently wants to give the US Fed scope to react should the economy enter a recession. The fear is that a new wave of Quantitative Easing would further inflate asset prices, exacerbating inequality.